Excess and surplus land (and why the difference matters)

Is it excess or surplus land? And why does it even matter? Let’s talk about that today while looking at a real life example of a lot that is currently being divided.

Excess Land: This is when the lot is larger in size and the extra land (or excess) can be sold separately from the existing lot. In other words, a portion of the lot can be broken off from the rest, sold separately, and have a different highest and best use from the rest of the lot.

excess-land-sacramento-appraisal-blog

Surplus Land: This is when the lot is larger in size and the extra land (or surplus) cannot be sold off separately. This means the “surplus” doesn’t have a separate highest and best use. The larger size is simply extra land that still might have some value, but it can’t be used for a separate purpose from the rest of the lot.

surplus-land-sacramento-appraisal-blog

Why does this matter?

1) Real Estate Jeopardy: Next time you’re on Jeopardy you’re going to sound like an expert when the category is land.

2) Assuming Value: It’s easy to assume a larger lot is always more valuable, but we have to ask if we’re dealing with surplus or excess land because it could make a difference in the value. At times we see a large lot size and get distracted like we’ve seen a bright shiny object. But can the land be divided? What can it be used for? Does the parcel shape help the lot be useful for buyers? And what have comps with larger lot sizes actually sold for too? 

3) The Bottom Line: Here’s the big deal. A larger lot that can be divided might be worth far more than a larger lot that cannot be divided (thanks Captain Obvious). For instance, the lot in the example above is located in the Curtis Park neighborhood and the extra space in the backyard is considered excess land because it CAN be divided and have a separate highest and best use. This backyard is currently being split by Keith Klassen in order to build two new homes. Anyway, this reminds us how important it is to talk with the local planning department to see what possibilities exist for extra space on a lot. We might see something big and assume it can be divided, but can it really? What does zoning allow? Moreover, is it realistic for the property to be divided right now? Remember, just because a lot can be divided doesn’t necessarily mean its going to happen in the current market. For instance, imagine values are tanking and new construction has stopped in the area. In a market like that any excess land might not command much of a value premium. But in a market where values are up and construction is happening, there is a higher probability of the lot being worth far more because it might be split.

keith-klassen-new-construction-in-curtis-park-sacramento

I hope this was helpful. There are many other things we could discuss here, so let’s kick around some ideas in the comments.

Questions: Anything else to add? Any stories to share? Did I miss something? I’d love to hear your take.

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Comments

  1. says

    Thank you for the article Ryan. This is such a big issue for appraisals. The truth is that lenders often do not want to lend on the value of land that can be divided and often residential appraisers do not know how to deal with excess land (usually appraisers do a good job with surplus land). Lenders will typically have guidelines to follow for such a situation and sometimes it involves assumptions that the excess land is not there or is not dividable. I have an appraiser friend who did an appraisal on a home that definitely had a highest and best use to divide. The appraisal was for a lender. He did not consider the subdivision potential in the report. There was a complaint filed with the state relating to the appraisal and the appraiser ended up losing his license for five years because of ignoring the subdivision potential. The moral of the story is that appraisers cannot ignore excess land. They must analyze the highest and best use, come to a conclusion of highest and best use, disclose what they know and what they do not know, and make any assumptions necessary to move forward and deal with the situation. Also, an appraiser must be competent to take an assignment where the highest and best use is questionable (in other words, has excess land).

    • says

      That’s sobering for your friend to have lost his license for 5 years. I agree with you excess land cannot be ignored. Thank you Gary. I appreciate your comments.

      Appraisers, what have you done when appraising a property with excess land? if it was for a lender, what did the lender ask you to do? Please share.

  2. Mike Robertson says

    Excellent article Ryan. This is a fairly frequent challenge for many appraisers. And it often triggers a follow-up issue with Highest & Best Use, when subdividing the site creates more value in that alternate use.

    • says

      Thanks Mike. I appreciate it. Yeah, this can become a complicated assignment really where the appraiser may need to consider two values (the house with the smaller lot and then the value of the excess lot).

  3. says

    OMG Ryan!!

    I didn’t even know what I didn’t know but I knew I was missing something that I needed to know!! ;))

    This is so timely because I’m looking at two properties with almost twice as much land as normal and I’ve been struggling with comping them because of that!

    And with one lot, I’ve been thinking I could actually build two houses on it…but now, thanks to your blog, I will avoid assuming that I can do that without making sure first!

    I did’t know there was “Excess” land and “Surplus” land, I just thought it was all excess land!

    You teach me something with every new blog post…THANK YOU!! 😉

  4. says

    Very timely for me Ryan. I am doing an an appraisal on a home that is around 70-80 years old. The developer at that time took 3 lots for himself to build his home and stuck his house right in the middle. I explained the difference to the owner between excess land and surplus land like you laid out here. Unfortunately because of the location of the house on the three lots and the setbacks it would not be possible to sell off any part of the site for another use. The extra land did provide value but not to the extent of another separate lot. Thanks for explaining this in an understandable way.

    • says

      Wow Tom, that’s a great example. Thanks for sharing. It sounds like you did a solid job explaining this to the owner. This is where the rubber meets the road with this post and it’s important to explain the difference between surplus and excess. I realize it’s easy to mix up these two words also (like prostrate and prostate (okay, maybe that was a stretch)).

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